Signal/Noise

Joel Spolsky, an entrepreneur and columnist for Inc., wrote an interesting piece last month asking whether his strategy of slow, consistent growth was actually a recipe for failure:

I have always believed that there is a natural, organic rate at which a business should grow, and that if we expanded too fast, the wheels would come flying off.  Then I came across a quote from Geoffrey Moore, who is best known for his best-selling book Crossing the Chasm, which is about how businesses cross over from their initial niche markets to dominate larger markets. In another book, called Inside the Tornado, Moore writes about the great battle between Oracle and Ingres in the early 1980s. The winner of that battle is well known: Oracle now has a market cap of more than $100 billion, and I’ll bet you’ve never heard of Ingres.  Moore explains that “for pragmatist customers, the first freedom in a rapidly shifting market is order and security. That can only come from rallying around a clear market leader. Once the apparent leader-to-be emerges, pragmatists will support that company, virtually regardless of how arrogant, unresponsive, or overpriced it is.”

The reasons why breakneck growth may be preferable to steady, conservative growth can be summed up in two bullet points:

1. As noted above. network effects that attach to the market leader
2. Generation of revenue and capital that can be reinvested in the firm to improve systems, products, as well as increase advertising spend and bolster sales efforts

To be sure, these are logical arguments.  However, I think to what extent the logic holds is dependent on a few factors, such as product and/or industry.  Additionally, whether a high-growth strategy will be successful depends in large part on whether their is a plan at the outset that includes provisions for how to effectively manage the growth.

First, network effects do not obtain in every industry or for every product. In some cases, like software, social networking websites, etc, a product’s worth is highly dependent on how many people use it. Issues of compatibility, integration, and utility will push customers to select the service with the highest volume of users. This in turn makes the service more attractive to additional users, etc, etc. When you look at business models like Twitter or Facebook, they’ve absolutely pushed to expand membership (basically, their customer base) at a pace that at times has outpaced their infrastructure and ability to delivery crisp service. However, they’ve built up such a lead in terms of users and customers that the barrier to entry for additional social networking or micro-blogging sites is extremely high. But this isn’t necessarily the case for all other products or industries. Take breakfast cereal. Is there some advantage customers gain by purchasing the highest-selling cereal in the market as opposed to the cereal that meets their taste and nutritional requirements? To be sure, branding can provide customers with a shortcut for their buying decision, but if quality deteriorates their are no shortage of competing products for customers to flock to.

A better example might be strategy consulting. McKinsey is often mentioned as the Cadillac of strategy consulting. To be sure, they are a market leader and employ tens of thousands of consultants. However, what makes them so dominant is not simply that their client base encompass most of the Fortune 500 or that they have thousands of consultants–it’s the quality of their work. McKinsey didn’t become a market leader because they grew rapidly. They became a market leader because the quality of their work was unmatched. McKinsey has relied less on a network-effect than on a halo-effect–the perception that their work is far superior to their competitors and, as a result, other firms feel compelled to leverage their expertise as a result. (If anything, the latter may have caused the former.) In other words, working with McKinsey is a best-practice. As the saying goes, no one ever got fired for hiring McKinsey.

Hypothetical Returns from Growth

Second, given the advantages listed above a business should certainly push the envelope but only to the extent that it can manage its rapid growth. Think of the relationship between growth rate and the return from that growth as a parabolic function. Like the Laffer Curve, the idea is that while increase growth theoretically bestows all sorts of advantages on a firm there comes a point where the growth will actually bring negative returns. As Spolsky notes, rapid growth can strain a firm’s ability to delivery quality to its customers. However, I would argue the difference between the wheels falling off altogether and reaping the full rewards of the growth is whether the business built itself as a platform for growth. What I mean by this is that firms that will be successful pursuing a high-growth strategy will have likely been engineered to deal effectively with that growth.  Here are just a few provisions/topics I think would need to be addressed at the outset:

• developing a strategy for recruiting and retaining top talent during growth phase, as competitors will likely try to siphon off employees in an attempt to catch up (this would include pay, recognition, promotion requirements, etc).
• identifying tasks that will need to be automated sooner rather than later as volume crosses various thresholds
• building systems that are scalable and amenable to rapid expansion and integration with customer and partner systems
• identifying alternative ways of meeting manufacturing requirements, either through acquisition, partnership, or outsourcing

Admittedly this is easier said than done.  However, the choice isn’t all or nothing.  Companies that consciously pursue a breakneck growth strategy out of the gate should do what they can to support that growth with a forward-looking strategy, not one that only focuses on how to grow, but also with what to do once you grow.  As they progress, the strategy will obviously need to be revisited and revised, but I would think trying to think through the implications of growth ahead of time will make a big difference.